One of our recurring themes is to reduce risk in your portfolio. We make some suggestions from BB rated credits right through to AAA rated securities for both wholesale and retail investors and in AUD and USD

Credit ratings matter in bond markets. A high credit rating means lower risk that translates to a lower cost to borrow, and therefore a lower yield for investors.

See the guide below describing the different credit rating meanings. Note that the ‘AA’ range is deemed ‘Highest quality’ while the lowest rated investment grade ‘BBB’ range is described as ‘Lower medium grade, adequate but weakened payment capacity’.

Move down into sub investment grade or high yield and the ‘BB’ range is described as ‘Speculative, elevated vulnerability, substantial risk but likely to fulfil obligations.

Source: FIIG Securities, S&P Global Credit Ratings, Moody’s and Fitch

Historically, some corporations have bought insurance to improve credit ratings and lower the cost to issue. These days those particular bonds that are ‘credit wrapped’ are often overlooked or not given credit for the ‘wrapper’ even though it is still in place and does provide additional security to the bondholders.

One such bond that I’ve liked for many years is an inflation linked bond by Australian Gas Networks (AGN), previously known as Envestra. The infrastructure company owns 22,000 kilometres of mains pipeline servicing one million customers across five states and territories. The bond has a credit wrap from Assured Guaranty that improved its credit rating at first issue, lowering its cost of funding. The AGN bond is deemed very low risk. Unfortunately as the bond is available to retail investors we cannot disclose its credit rating.

However, here is a list of bonds available to retail and wholesale clients, moving from lowest risk at the top of the table to highest risk at the end.

Australian dollar bonds available to retail and wholesale clients

Source: FIIG Securities
Note: Prices and credit ratings accurate as at 11 June 2018, but subject to change- All bonds are senior unsecured, except the ANZ bond which is subordinated- Inflation linked bonds assume inflation at the RBA target mid point of 2.5%pa- Credit ratings cannot be disclosed to retail clients, however this list runs from lowest risk issuer by credit rating then for similarly rated credits- Assumes early maturity dates equates to lower risk, although this is not necessarily the case

This is the first of three tables, showing a range of bonds to give you an idea of what’s possible but the bonds listed are in no way recommendations. You’ll still need to do your research to determine if they suit your risk/ return and cashflow goals.

In the next table we show a range of Australian dollar denominated bonds that are available to wholesale investors only. We can therefore disclose the credit ratings.

Australian dollar bonds available to qualified wholesale clients only

Source: FIIG SecuritiesNote: Prices and credit ratings accurate as at 11 June 2018, subject to change

Scanning the list above, just goes to reiterate the very low interest rate environment and as a consequence, the low yields available on many investment grade bonds.

However, you can see that typically, the shorter the term, the lower the yield. So one way to try and increase yield is to invest for longer. The Aroundtown SA bond is a good example with a longer May 2025 maturity date delivering a yield to worst of 4.34%pa.

We don’t list any AUD sub investment grade bonds given our theme is to reduce risk by moving up the credit rating spectrum.

The final list shown below is of US dollar bonds. We do have some sub investment grade bonds here, with the lowest rating we show being BB-. We do not make any CCC bonds available under FIIG policy with single ‘B’ range bonds, the lowest on our available list. Below we chose to just show ‘BB’ range and above, for this week’s theme of moving up the credit rating spectrum.

USD bonds available to qualified wholesale clients only

Source: FIIG SecuritiesNote: Prices and credit ratings accurate as at 11 June 2018, subject to changeAll bonds are fixed rate

Two classes of securities are that are worth considering but not mentioned in this note are indexed annuity bonds which are available to both retail and wholesale clients as well as residential mortgage backed securities (RMBS) available for wholesale qualified clients only.

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An investment in notes or corporate bonds should not be compared to a bank deposit. Notes and corporate bonds have a greater risk of loss of some or all of an investor’s capital when compared to bank deposits. Past performance of any product described on any communication from FIIG is not a reliable indication of future performance. Forecasts contained in this document are predictive in character and based on assumptions such as a 2.5% p.a. assumed rate of inflation, foreign exchange rates or forward interest rate curves generally available at the time and no reliance should be placed on the accuracy of any forecast information. The actual results may differ substantially from the forecasts and are subject to change without further notice. FIIG is not licensed to provide foreign exchange hedging or deal in foreign exchange contracts services. FIIG may quote to you an estimated yield when you purchase a bond. This yield may be calculated by FIIG on either A) a yield to maturity date basis; or B) a yield to early redemption date basis. Some bond issuances include multiple early redemption dates and prices, therefore the realised yield earned by you on the bond may differ from the yield estimated or quoted by FIIG at the time of your purchase. The information in this document is strictly confidential. If you are not the intended recipient of the information contained in this document, you may not disclose or use the information in any way. No liability is accepted for any unauthorised use of the information contained in this document. FIIG is the owner of the copyright material in this document unless otherwise specified.
The FIIG research analyst certifies that any views expressed in this document accurately reflect their views about the companies and financial products referred to in this document and that their remuneration is not directly or indirectly related to the views of the research analyst. This document is not available for distribution outside Australia and New Zealand and may not be passed on to any third party without the prior written consent of FIIG. FIIG, its directors and employees and related parties may have an interest in the company and any securities issued by the company and earn fees or revenue in relation to dealing in those securities.

Director – Education and Research
Elizabeth is considered an expert in the fixed income asset class and is a regular contributor to The Australian. She frequently writes for and is quoted in other press.

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At FIIG, fixed income is our sole focus. We enable investors and issuers to directly access a broad range of fixed income products and services. Not only do our customers have the most up to date market research and the expertise of our in-house professionals at their fingertips, they also have access to deposit rates from an extensive range of APRA regulated banks, credit unions and building societies. At FIIG we're guided in everything we do by our clear and single-minded purpose: Creating access to fixed income investments you can trust.

FIIG provides general financial product advice only. For a copy of our disclaimer please refer to fiig.com.au/disclaimer* Based on FIIG’s high yield sample portfolio. Click here to view. Subject to change and before fees. Please see our FSG for any applicable fees.